by Elaine Torry, Co-Head of Trustee DB Investment at Hymans Robertson with contributions from Ross Fleming, Co-Head of Trustee DB Investment, Simon Jones, Head of Responsible Investment and Mark Baker, Head of Fiduciary Oversight
This is a positive move, as we believe all trustees should be looking for value at all times, whilst advisors should continually challenge themselves to consider the value of their advice.
Action for Trustees: Focus on the intent of the regulations and use it to help improve the value for money you’re achieving on behalf of your members. Treating the regulations purely as a compliance exercise will result in wasted governance time without receiving any tangible benefits.
2. Develop a robust risk management plan to avoid market turbulence
2019 was a turbulent year. A number of global events, which had also impacted markets in 2018, continued to bubble away for most of 2019. Periodically rising to the surface, these events created several headwinds and tailwinds for pension schemes throughout the year, and early signs suggest 2020 isn't going to be any smoother sailing.
Action for Trustees: Develop a robust risk management plan which locks in upside gains from the tailwinds whilst avoiding the full extent of potential losses from the headwinds. This will see schemes taking risks that can be afforded and that are rewarded, and essentially remaining on track to the long term objective.
3. Demonstrate a responsible approach to investment
Continuing the momentum gathered in 2019, trustees will need to demonstrate the tangible actions they're taking to be responsible investors in 2020 and, importantly, the consequences of those actions. It'll be essential for trustees to hold their investment managers to account and consider how they can give their stewardship activities more bite. Further, whilst the breadth and depth of ESG information is likely to continue to grow supporting monitoring activity, this needs to be translated into a form that helps trustees act, answering the “so what?” question.
Action for Trustees: Challenge your investment managers to shape their activity and reporting, and challenge your own approach to equity index investing, including the options for migrating towards climate-aware index benchmarks.
4. Consider the potential alignment of RPI to CPI
The consultation for the proposed alignment of RPI to CPI is set to take place in January, with the results due for release in Q2 2020. The impact on funding positions could be wide ranging, and will depend on (1) the scheme’s existing exposure to index linked gilts and the level of compensation offered if there is a re-alignment of RPI; and (2) the reference rate for inflation in the scheme’s benefits.
Action for Trustees: Consider the extent of the possible impact of any realignment that is introduced, and identify courses of action that could be taken to help avoid material swings in funding positions as a result. While the exact impact is unlikely to be known for some time, the results of the consultation in 2020 may help to give some insight.
5. Fiduciary oversight – beat the queues and get value for your efforts
Driven by new CMA requirements, we expect 2020 to be a very busy year for the fiduciary manager market. There are over 900 fiduciary mandates in the UK of which a large portion will need to be tendered in the next 18 months.
Action for Trustees: For trustees looking to appoint a new fiduciary manager, or to tender an existing appointment, getting this done sooner rather than later should help avoid a looming capacity crunch later in the year; you will get better engagement from managers and more chance of finding the right one for your needs. Even if you’re comfortable with your existing fiduciary, think carefully about how you can get the most value from any tendering exercise rather than thinking of it as compliance box-ticking.
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